Making the Case for Oilheat

Case for Oilheat

Associations file reports refuting the value of fuel conversion

 

With state agencies in Massachusetts, New York and other states introducing plans to expand natural gas infrastructure and convert customers to natural gas heating, Oilheat associations are pulling out all the stops to defend their member companies.

In Massachusetts, the state Department of Energy Resources (DOER) last year launched a study of possible natural gas expansion as a way to help the state comply with the Global Warming Solutions Act that the state enacted in 2008. That law requires the state to reduce greenhouse gas emissions by 25 percent from 1990 levels by 2025 and by 80 percent by 2050.

As a stakeholder in the process, the Massachusetts Energy Marketers Association filed a report with the DOER in December that was prepared by Richard Sweetser, of Exergy Partners.

The report lays out a scientific case for Oilheat, explaining how it benefits consumers and the environment at least as much as natural gas. Here is a look at some of the report’s key findings.

 

Conversion Costs

 

ConversionChart The report points out that switching a home from an oil-fired boiler to a gas boiler is a costly proposition that involves boiler replacement; chimney replacement or relining; a gas main; service line extension and meter set; gas water heater; and removal and disposal of the fuel storage tank. The report estimates conversion costs at $18,783 (see table right).

The report evaluates the relative heating expenses in identical homes using oil and gas and concludes that gas heating requires more energy per BTU than oil heating in non-condensing appliances because of the higher hydrogen content in gas.

A condensing gas boiler would offer higher AFUE efficiency than a non-condensing oil unit, the report states, but condensing boilers are unsuitable for many Massachusetts homes. That’s because most existing residential hydronic loops were designed based on high return water temperatures and do not allow for condensing during most operating conditions.

The report introduces the concept of an “economic indifference curve” to illustrate that even with today’s reduced natural gas prices, most consumers would be indifferent to the prospect of swapping out a non-condensing oil system for a non-condensing gas system, due to inadequate financial reward.

The report also cites statements from Oilheat customers who were surveyed by Sussex Energy Advisors, the contractor who drafted DOER’s preliminary gas expansion report. The following are four of the customer comments:

 

“Unless there is some incentive that can pay it back in 2-3 years, forget it.”

“My formula is this. If it’s paid back in savings in 5 years or less and cost less than $15,000, then I will deal with it.”

“If you really save me 50% on my energy bill and it cost less than $10,000, it will be worth it.”

“I had my furnace replaced in my other house when they brought gas to my neighborhood. What a mess. It was late spring. My yard was ripped up, mud all over the house from the workers, they had to cut up my old oil tank, days of cleaning up after they left. In the end it was well worth it, but what a mess.”

 

Fifty-four percent of the consumers surveyed by Sussex rated fuel conversion as very difficult or somewhat difficult. “This means that the economic indifference curve must be viewed with a bias toward not converting,” the Exergy report states.

 

Future Natural Gas Prices

 

The Exergy report goes on to examine the notion that today’s relatively low natural gas prices will be sustained over time. Since 2003 when the U.S. Energy Information Administration (EIA) began projecting prices out to the year 2025, there has been a significant turnaround in the agency’s projections.

Between 2003 and 2009, EIA’s estimate of the 2025 natural gas price increased by 56 percent, and by 2013 the projection had returned back to the same level projected in 2003. This indicates a low correlation between projections and actual prices, the report states.

Low natural gas prices that have occurred in recent years have led to more natural gas use for power generation and the development of export facilities to send natural gas overseas, where prices are much higher. The report predicts that natural gas prices will climb as a result.

 

Falling Distillate Imports

 

While natural gas prices are positioned to increase, heating oil prices are showing signs of stabilizing, according to the Exergy report. “New England markets require very little diesel and heating oil supply from non-Canadian sources. In fact, East Coast imports of diesel fuel and heating oil into the market have been falling since 2004,” the report states.

Exergy cites EIA data showing that the U.S. crude supply, including Canadian and Mexican resources, has been rising rapidly and is expected to increase at the recent pace for several years. “The combination of rising oil sands production in Canada, oil from shale across North America, renewable fuels and biofuels could result in self-sufficiency for the region by 2020,” the report says.

Comparing oil and natural gas prices, the report concludes that, “Long-term oil and gas price forecasts have changed dramatically over the years and are revised every year as perceptions about the future change. There are a growing number of signposts from both the oil and natural gas markets indicating that oil and gas prices may actually begin to converge back on each other over the next several years. Should the price premium for oil fall relative to natural gas, any fuel cost savings from switching to natural gas will erode.”

North American natural gas prices, meanwhile, have fallen to the lowest levels in over a decade due to rising supplies of low-cost shale gas. “In general, the North American natural gas market is now demand constrained; e.g., there isn’t enough demand to absorb rising supplies. As a result, natural gas prices have fallen to low enough levels to replace coal in power generation and prevent new coal and nuclear plants from being built. At least 21 LNG export projects in the U.S. lower 48 and Canada have been proposed by 2020. These total over 27 bcf/day of natural gas demand, which is equivalent to 40 percent of 2011 U.S. gas demand. Rising natural gas demand from power generation and future LNG exports could cause natural gas prices to rise from the recent low levels.”

 

Greenhouse Gas Emissions

 

MEMA-Report-Fig3

The report notes that the science of greenhouse gas (GHG) emissions is evolving rapidly, and the International Panel on Climate Change (IPCC) has determined that methane, the primary ingredient of natural gas, is 17 percent more potent as a greenhouse gas over a 20-year timeframe than was previously believed.

At the same time, a recent Harvard University study concluded that regional methane emissions due to fossil fuel extraction and processing could be several times higher than was stated in the most comprehensive global methane inventory.

Combing the data, the report concludes that a blend of ultra low sulfur heating oil and biodiesel is equivalent to natural gas in GHG emissions, even when the bioblend ratio is as low as 1 percent to 1.6 percent.

“Increasing the biodiesel fraction over time will dramatically reduce the GHG emission well below natural gas. Keeping in mind that natural gas suppliers are pursuing various types of biogas, there is no current technology on the horizon that is economically viable,” the report says.

“All the above is not to say that natural gas is not a good fuel, but to create public policies in place to coerce conversion from heating oil (ULS HO/bioblends) may, in fact, increase GHG emissions.”

New York Associations Weigh In

 

Like Massachusetts, New York State is developing a plan to expand the natural gas infrastructure. When the New York State Public Services Commission requested comments on its Gas Expansion Case, the Oilheat associations in the state joined forces and weighed in.

Working together, the Empire State Petroleum Association, the New York Oil Heating Association and the Oil Heat Institute of Long Island filed four separa

te reports, including an assessment of liquid fuel emissions; an analysis of oil and natural gas markets; a look at energy efficiency and conservation opportunities for residential Oilheat; and an economic impact study.

On economic impact, the report noted that the industry provides at least:

  • 12,000 direct and indirect jobs in New York State, generating some $24 million in state personal income taxes paid;
  • Some $656 million in total annual income on annual sales of about $11 billion;
  • $151 million in sales taxes and $5 million in Petroleum business taxes.

The following are excerpts from the reports filed in New York State.

 

Statements about Natural Gas and Heating Oil

 

“The Public Service Commission’s Order begins with the statement that natural gas is a cleaner fuel than other fossil fuels used for home heating. …Much of the difficulty with most emissions data is that they reflect limited information from the burner tip. This does not provide an accurate view of a fuel’s emissions profile. …When all information is considered, ultra low sulfur heating oil, when combined with biodiesel, will have competitive emissions that are comparable to natural gas.

“In addition to the decrease in emissions, the improvements to heating oil will have a number of other desired benefits. Maintenance costs to customers will be reduced, heating system performance will be improved, and ultra-efficient equipment will be available for consumers. Also, the use of biodiesel blends will increase the state’s use of a domestically produced renewable energy source.”

 

Current Prices Should Not Be Basis of Study

 

“The most significant factor driving oil-to-gas conversions in the competitive marketplace today is the low cost of natural gas. The Order refers to this price advantage in its opening paragraph and mentions the potential cost savings to customers as a reason to search for additional ways to entice customers to convert. However, relying on price disparities for established long-term policies and practices would be unwise.

“Long-term oil and gas price forecasts have been historically unreliable. At present, natural gas, as a commodity, is cheaper than heating oil. …There is no guarantee that the price difference between oil and gas will continue and no foolproof manner to predict future prices. However, basing conversion policies on current prices could be detrimental to customers in the long run.”

 

Utilities Don’t Need Incentives

 

“Electricity, natural gas, heating oil, propane and renewable energies all vie for heating customers in New York State’s energy marketplace. Liquid fuels distributors and others must compete against their own industry members as well as the monopoly utilities.

“The market inherently favors the public utility because they have defined service territories and do not have to devote time, money and resources to compete against other utilities for customers, at least in the transmission and distribution market.

“The public utility’s name in the energy market also gives it an advantage. No independent small business has the same name recognition as the local public utility. This name recognition must be considered when assessing the impact on competitors of any proposed recommendation on policy.

“Some gas utilities already possess substantial ratepayer funded promotional budgets to encourage oil-to-gas conversions. In the case of KeySpan New York and KeySpan Long Island, those promotional amounts are massive. When last checked, these amounts were $15 million and $17 million annually, respectively. No marketer can compete with this level of promotional funding.

“In addition, gas utilities have ratepayer- funded energy efficiency programs that offer high-efficiency equipment as incentives to potential conversion customers. The amount of money that is generated by each utility’s system benefit charge, which is committed to energy efficiency improvement, total in the tens of millions of dollars. …There is no need to provide further incentives in the competitive marketplace.”

 

Government Interference

 

The free operation of the energy marketplace without government bias favoring any energy source over another should be a guiding principle of the state’s energy policy. Government interference in the marketplace carries with it a legacy of limitation on consumer choice and harm to competitors.

“Market forces, rather than artificial government constraints, stimulation or incentives, should determine consumer preferences in the energy marketplace.”

 

Diversified Energy Marketplace

 

“Maintaining a diversity of fuel sources is of paramount importance. Having an appropriate fuel mix prevents an overreliance on one fuel that could lead to difficulties in times of peak demand.

“The heating oil industry acts as the backup fuel provider for gas utility interruptible customers. At times of peak demand, these gas customers must interrupt gas service and rely on their backup fuel, which is usually heating oil.

“Converting up to one million heating customers to natural gas not only means a loss of heating oil customers, it means increasing firm demand. In certain service territories this could result in more frequent interruptions to non-residential customers and greater reliance on heating oil marketers. However, the petroleum distribution industry cannot survive only as a backup fuel provider. Similar to the natural gas industry, petroleum marketers must rely upon full-time customers in order to thrive in the business world.”

 

Customers Better Served by Upgrades?

 

“There is a notion inherent in this proceeding that conversions to natural gas will undeniably benefit customers. We urge the Commission to be mindful that improvements to a heating system could be more beneficial to an individual customer than converting. Energy efficiency upgrades to existing oil heat systems may often be a more economical choice for the heating customer than fuel switching.

“Oil heat efficiency upgrades can reduce fuel use anywhere from 25% to 40%, often with a payback time to homeowners in the range of one to five years. … It must be noted that sometimes the overlooked expenses, when combined, can increase the conversion from oil heat to natural gas by $4,000 to $7,000, bringing the entire cost for fuel switching to as high as $11,500 to $15,000.”

 

Conclusion

 

“We understand the state’s desire to enhance its electric and natural gas infrastructure for safety, reliability and economic development reasons in New York. However, we do not believe that such a path to growth should be pursued to the detriment of the heating oil industry, a vital and needed segment of the energy industry.

“We respectfully request that the Commission take into account the information provided in these comments and to act in a manner that strengthens, rather than influences, the competitive energy marketplace. Such an approach will benefit the state’s entire energy sector and all of its energy consumers.”

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